Capital Gains Tax Rate - What Happens In The Short Term
November 27, 2004
By Srinidhi Goenka
Capital gains tax is levied on the gains made by
you on the sale or disposal of an asset. This rate
is dependent on several factors including the duration
of time for which you were the owner of the asset
before selling it. The short term capital gains
tax rate is levied on an asset held for a period
of one year or less.
The capital assets which have been held for the short
term receive no preferred tax treatment. These are
taxed at the normal income tax rate. The normal income
tax rate can fall into two groups, namely taxes at
the rate of 15% or taxes above 15%; depending upon
your income bracket.
The capital gains tax rate in the short term is normally higher
than for assets held beyond a one year period. To make things clearer,
the tax structure is as follows :
Income tax payable at the rate of 15% :
· Capital gain tax rate on assets held within one year:
15%.
· Capital gain tax rate on assets held beyond a period
of one year: 10%.
Income tax payable at a rate higher than 15% :
· Capital gain tax rate on assets held within one year:
From 28% to 39.6%, depending upon your specific income tax rate.
How to be Tax-Savvy
As can be seen from the above rates, the longer the time period
for which the asset is held, the lower is the tax payable on it.
Let us assume that you fall in the income bracket wherein the tax
payable by you is above 15%, say at the rate of 35%. The value of
your stock is $1000.
Now, selling it within 1 year of purchase will lead to a tax deduction
of 35% i.e. $350.
However, if you hold onto the stock for, say, 1 ½ years,
then the tax deduction will only be 20% i.e. $200.
So, you have to answer the critical question that whether your
short-term earnings for this stock will be sufficient enough to
compensate for the fact that you will pay almost double in taxes
vis-à-vis holding onto it for some more time ?
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